analysis on how to handle my first deal with my GC

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analysis on how to handle my first deal with my GC

Jonathan Prettyman
Clifton Heights, PA · Member since 2014 · 15 posts · 1 vote
Hey guys, Here is an example of my first deal I am looking to do. I mainly need advice on which route to take with my GC, who is my father in law. I proposed to him 2 scenarios. and he suggested a 3rd. Initially I came to him with this idea. I want to get into buying and flipping and he would be my contractor. so I would put up all money. secure a mortgage, carry the holding costs and I strictly pay him to do the work with my own money. then When I sell I recoup all profit. another option I suggested so we could pay cash would be if we went 50/50 on everything. (he puts up cash or line of credit) and we split profit at the end. so he suggested a little different of a 50/50 split which I am unsure about? So I would put up all money (mortgage, material, etc) no labor cost. then when we sell we split all profit after I get all money I put up back. so he puts up no money but gets paid when we sell. also he would bring in another contractor as his partner to help with work. so his idea was when we sell, I recoup all money I put out of pocket and I would get 50% of profit and he and his partner split the remaining 50% at 25%/25% for doing the work. Example of a deals S price range I am looking at. 50-60k purchase price (hopefully cheaper) of a row home/townhouse in suburb in Delaware county area Philadelphia Full renovation 35-50k in renovation costs (that would be with labor included) total in and out costs roughly 90-110k and comps are 130-150k (these are all general numbers, not a specific deal.) so my question is which route should I take with him and is his proposed "50/50" deal fair? I understand if I pay him per job I have a higher risk and higher reward. and he gets paid regardless. and worst case scenario I rent it out if I can't sell it for what I want. the other side is if we are all invested then nobody gets paid until we sell. any advice would be greatly appreciated it. thank you.
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Chris Christianson
Contractor · Minneapolis, MN · Member since 2013 · 112 posts · 67 votes
10y

I'd agree with @Adam Bartomeo and @Rich O'Neill for the most part.  Take door number 3.  One thing I'd add is that lots of people miss the fact that time IS money.  If your father in law is on the site doing or managing work, he is investing whatever money he could have been making elsewhere with that time.  Typically, investors in the price range you're working in are expecting labor for border line slave wages.  $8-12/hr.  That's why most, quality contractors are not interested in work for fees on these projects.  The only way I can hope to make the money I would have made with my time/money is by either getting a cut of the profit, which is a risk I'm willing to take if I have a say in the buildout, or getting paid my full rate, which isn't going to happen.

My accountant bills me at $120/hour.  My mechanic, when I use one, runs $95-110/hour.  Realtors want 6% of everything I payed for on the front side and the equity I built with my time and experience.  Then there's gas, tires, tools, licensing fees, insurance, continuing education...  Someone wants to pay me $500/week for all that plus 20 years experiance...thanks but no thanks.  

I might have taken my response a little off topic but hopefully you get the point.  If you found someone that's willing and capable of investing their time/money for 25% of the profit on that size deal, take it and consider yourself lucky.

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  • Adam BartomeoBusiness Member
    Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
    10y

    I wouldn't accept that offer. 

    Everything is negotiable and it depends on what you are trying to accomplish. If you are looking to entice him into working with you then may be it works.

    I prefer to ONLY work with folks that have money in the game.

    I find the property, sell it, pay for all costs except labor and materials. They manage the job and pay for all material. 50/50

    Your time and money is equal to their time and money.

    [email protected]239-339-3969
    Bartomeo Property Management4.7143 Reviews
    WebsiteView Page
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  • Rich O'Neill
    Contractor · Chadds Ford, PA · Member since 2015 · 567 posts · 460 votes
    10y
    Jonathan Prettyman I like that deal but maybe you can get him to pay for materials. Since he is a GC he will most likely get better pricing and he can bring that advantage to the partnership, and it evens out the money put In a little more. Keep in mind he will most likely be hiring subs so there is labor cost there that he will either have to pay out of pocket or negotiate terms on. You would most likely not be able to do that on your own. If your father in law is good, keep him happy and don't get greedy. Good contractors are hard to find and its better to over pay a good one than underpay a bad one, especially if he is family, and let you marry his daughter!
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  • Rich O'Neill
    Contractor · Chadds Ford, PA · Member since 2015 · 567 posts · 460 votes
    10y
    Also Jonathan Prettyman where are you finding that spread in Delco? Most of the properties I have been looking at in Collingdale/Sharon Hill area do not have an ARV that high. They are still attractive to me because I am a Buy and Hold guy and the cash flow is pretty good but I see ARV's in the $70s on the type of property you described in those areas. Maybe I am looking in the wrong place!
    0Reply
  • Chris Christianson
    Contractor · Minneapolis, MN · Member since 2013 · 112 posts · 67 votes
    10y

    I'd agree with @Adam Bartomeo and @Rich O'Neill for the most part.  Take door number 3.  One thing I'd add is that lots of people miss the fact that time IS money.  If your father in law is on the site doing or managing work, he is investing whatever money he could have been making elsewhere with that time.  Typically, investors in the price range you're working in are expecting labor for border line slave wages.  $8-12/hr.  That's why most, quality contractors are not interested in work for fees on these projects.  The only way I can hope to make the money I would have made with my time/money is by either getting a cut of the profit, which is a risk I'm willing to take if I have a say in the buildout, or getting paid my full rate, which isn't going to happen.

    My accountant bills me at $120/hour.  My mechanic, when I use one, runs $95-110/hour.  Realtors want 6% of everything I payed for on the front side and the equity I built with my time and experience.  Then there's gas, tires, tools, licensing fees, insurance, continuing education...  Someone wants to pay me $500/week for all that plus 20 years experiance...thanks but no thanks.  

    I might have taken my response a little off topic but hopefully you get the point.  If you found someone that's willing and capable of investing their time/money for 25% of the profit on that size deal, take it and consider yourself lucky.

    2Reply
  • Account Closed
    Frederick, MD · Member since 2015 · 654 posts · 256 votes
    10y

    Is your father-in-law an active and experienced contractor currently running his own business, or is he going to act as the GC (but isn't particularly qualified)?  That changes the dynamic entirely.

    As well, if he weren't your father-in-law, is he someone with whom you'd want to work with?

    Option #4 exists too... which should be considered since it provides perspective... find another contractor you trust, who will perform at least as good as your father-in-law, pay them for their services, manage them and the project, etc.  In short, it's your first deal - you up for that?

    @Chris Christianson made some excellent points (and yet only touched on a few of them).  There is a difference between someone who is willing to do construction work and one whose career is in the industry and they've invested in that accordingly.  The latter is often well positioned to ask a prospect, "why should they work with/for them?"  In short, who needs who more, and who is in a position to make the other successful?  

    And if you're father-in-law is worth his salt, and brings something to the table you don't have otherwise, well... 

    2Reply
  • Jonathan Prettyman
    OP
    Clifton Heights, PA · Member since 2014 · 15 posts · 1 vote
    10y

    thank you both for the responses. ok so here is a little background. he owned his own general contracting biz years ago. got out of that , he currently works full time as a maintenance facilities foreman at a school district. but he is very active in doing side jobs. he  has many connections in the trades. so essentially this would be an on going relationship for us. as he is looking to supplement his income. and hopefully do it full time to quit his job. he is very experienced and trustworthy. does excellent work as he has remodeled my basement.  so he and his partner would take on these jobs day after work/weekends to get done in a timely matter.  besides any subs that may need to come in during the week. so all In all he would be More on the GC side managing the project all while still providing labor. he really wasn't that Strong on any of the 3 options, 

    0Reply
  • Jonathan Prettyman
    OP
    Clifton Heights, PA · Member since 2014 · 15 posts · 1 vote
    10y

    *after work and weekends

    0Reply
  • Jonathan Prettyman
    OP
    Clifton Heights, PA · Member since 2014 · 15 posts · 1 vote
    10y

    @rich o'neill 

    these properties are in glenolden/Clifton heights 

    0Reply
  • Dell Schlabach
    Investor · Canton-Akron, OH · Member since 2012 · 917 posts · 477 votes
    10y
    Originally posted by @Jonathan Prettyman:

    Hey guys,

    Here is an example of my first deal I am looking to do. I mainly need advice on which route to take with my GC, who is my father in law.

    I proposed to him 2 scenarios. and he suggested a 3rd.

    Initially I came to him with this idea. I want to get into buying and flipping and he would be my contractor. so I would put up all money. secure a mortgage, carry the holding costs and I strictly pay him to do the work with my own money. then When I sell I recoup all profit. another option I suggested so we could pay cash would be if we went 50/50 on everything. (he puts up cash or line of credit) and we split profit at the end. so he suggested a little different of a 50/50 split which I am unsure about? So I would put up all money (mortgage, material, etc) no labor cost. then when we sell we split all profit after I get all money I put up back. so he puts up no money but gets paid when we sell. also he would bring in another contractor as his partner to help with work. so his idea was when we sell, I recoup all money I put out of pocket and I would get 50% of profit and he and his partner split the remaining 50% at 25%/25% for doing the work.

    Example of a deals S price range I am looking at.

    50-60k purchase price (hopefully cheaper) of a row home/townhouse in suburb in Delaware county area Philadelphia

    Full renovation

    35-50k in renovation costs (that would be with labor included)

    total in and out costs roughly 90-110k and comps are 130-150k (these are all general numbers, not a specific deal.)

    so my question is which route should I take with him and is his proposed "50/50" deal fair? I understand if I pay him per job I have a higher risk and higher reward. and he gets paid regardless. and worst case scenario I rent it out if I can't sell it for what I want. the other side is if we are all invested then nobody gets paid until we sell.

    any advice would be greatly appreciated it. thank you.

     If I had quality contractors, that does good work that I can trust. I would take offer number three in a heartbeat. 

    I like the idea of him wanting to bring another contractor in to speed up the process, and he didn't ask for a 33/33/33 split. 

    I have two partnerships like that with contractors right now, as well as our own team. One partnership for almost two years and one about 9 month, and we are testing another one right now, so far they are working well. 

    I do put the cost of money is as an expense before we do the profit split.

    0Reply
  • Dell Schlabach
    Investor · Canton-Akron, OH · Member since 2012 · 917 posts · 477 votes
    10y
    Originally posted by @Dell Schlabach:
    Originally posted by @Jonathan Prettyman:

    Hey guys,

    Here is an example of my first deal I am looking to do. I mainly need advice on which route to take with my GC, who is my father in law.

    I proposed to him 2 scenarios. and he suggested a 3rd.

    Initially I came to him with this idea. I want to get into buying and flipping and he would be my contractor. so I would put up all money. secure a mortgage, carry the holding costs and I strictly pay him to do the work with my own money. then When I sell I recoup all profit. another option I suggested so we could pay cash would be if we went 50/50 on everything. (he puts up cash or line of credit) and we split profit at the end. so he suggested a little different of a 50/50 split which I am unsure about? So I would put up all money (mortgage, material, etc) no labor cost. then when we sell we split all profit after I get all money I put up back. so he puts up no money but gets paid when we sell. also he would bring in another contractor as his partner to help with work. so his idea was when we sell, I recoup all money I put out of pocket and I would get 50% of profit and he and his partner split the remaining 50% at 25%/25% for doing the work.

    Example of a deals S price range I am looking at.

    50-60k purchase price (hopefully cheaper) of a row home/townhouse in suburb in Delaware county area Philadelphia

    Full renovation

    35-50k in renovation costs (that would be with labor included)

    total in and out costs roughly 90-110k and comps are 130-150k (these are all general numbers, not a specific deal.)

    so my question is which route should I take with him and is his proposed "50/50" deal fair? I understand if I pay him per job I have a higher risk and higher reward. and he gets paid regardless. and worst case scenario I rent it out if I can't sell it for what I want. the other side is if we are all invested then nobody gets paid until we sell.

    any advice would be greatly appreciated it. thank you.

     If I had a quality contractors, that does good work that I can trust. I would take offer number three in a heartbeat. 

    I like the idea of him wanting to bring another contractor in to speed up the process, and he didn't ask for a 33/33/33 split. 

    I have two partnerships like that with contractors right now, as well as our own team. One partnership for almost two years and one about 9 month, and we are testing another one right now, so far they are working well. 

    I do put the cost of money is as an expense before we do the profit split.

    0Reply
  • Dell Schlabach
    Investor · Canton-Akron, OH · Member since 2012 · 917 posts · 477 votes
    10y
    Originally posted by @Dell Schlabach:
    Originally posted by @Jonathan Prettyman:

    Hey guys,

    Here is an example of my first deal I am looking to do. I mainly need advice on which route to take with my GC, who is my father in law.

    I proposed to him 2 scenarios. and he suggested a 3rd.

    Initially I came to him with this idea. I want to get into buying and flipping and he would be my contractor. so I would put up all money. secure a mortgage, carry the holding costs and I strictly pay him to do the work with my own money. then When I sell I recoup all profit. another option I suggested so we could pay cash would be if we went 50/50 on everything. (he puts up cash or line of credit) and we split profit at the end. so he suggested a little different of a 50/50 split which I am unsure about? So I would put up all money (mortgage, material, etc) no labor cost. then when we sell we split all profit after I get all money I put up back. so he puts up no money but gets paid when we sell. also he would bring in another contractor as his partner to help with work. so his idea was when we sell, I recoup all money I put out of pocket and I would get 50% of profit and he and his partner split the remaining 50% at 25%/25% for doing the work.

    Example of a deals S price range I am looking at.

    50-60k purchase price (hopefully cheaper) of a row home/townhouse in suburb in Delaware county area Philadelphia

    Full renovation

    35-50k in renovation costs (that would be with labor included)

    total in and out costs roughly 90-110k and comps are 130-150k (these are all general numbers, not a specific deal.)

    so my question is which route should I take with him and is his proposed "50/50" deal fair? I understand if I pay him per job I have a higher risk and higher reward. and he gets paid regardless. and worst case scenario I rent it out if I can't sell it for what I want. the other side is if we are all invested then nobody gets paid until we sell.

    any advice would be greatly appreciated it. thank you.

     If I had a quality contractor, that does good work who I can trust. I would offer number three in a heartbeat. 

    I like the idea of him wanting to bring another contractor in to speed up the process, and he didn't ask for a 33/33/33 split. 

    I have two partnerships like that with contractors right now, as well as our own team. One partnership for almost two years and one about 9 month, and we are testing another one right now, so far they are working well. 

    I do put the cost of money is as an expense before we do the profit split.

    0Reply
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